David Cameron, the Prime Minister of the UK, said that companies like Google are immorally minimizing tax bills

Google has managed to skip paying about $1.6 billion USD (£1 billion) in taxes by way of the island Bermuda -- and the Prime Minister of the United Kingdom isn't happy.

Google sent £6 billion through Bermuda over the course of last year, which halved its 2011 tax bill. In fact, Google funneled 80 percent of its global revenue through the island and ended up paying about £1 billion less to the government.

Google's Executive Chairman Eric Schmidt said this "is called capitalism."

“We pay lots of taxes; we pay them in the legally prescribed ways,” said Schmidt. “I am very proud of the structure that we set up. We did it based on the incentives that the governments offered us to operate.”

David Cameron, the Prime Minister of the UK, said that companies like Google are immorally minimizing tax bills and need to be stopped. He even wrote a letter to fellow leaders of the G8 requesting a global crackdown on tax avoidance for large companies such as Google and Starbucks.

“I do believe we all have a common interest in being able to tell our taxpayers who work hard and pay their fair share of taxes that we will make sure others do the same,” wrote Cameron in an open letter to the G8.

Google's UK Head Matt Brittin said politicians are the ones who set tax rates, and that Google is playing by their rules.

Google funneled £2.6 billion of British revenue through Bermuda, which cut its UK tax bill by £200 million.

In April of last year, it was reported that Apple made $9.5 billion USD in Britain for 2011, but only paid 0.16 percent in taxes. Amazon was also targeted for its headquarters in the tiny European Union nation of Luxembourg and Google's placement in Ireland with subsidiaries in the Caribbean and Luxembourg for more tax dodging gains.

It's easy for the UK to forget how things work. The main corporation tax rate in the UK is 28%. Ireland's main rate is 12.5%. If you are a US global corporation looking to set up shop in Europe, which would you choose?

Secondly, Google is not taxed as a single entity - it's subsidiaries are taxed. And these are all separate legal entities capable of selling and purchasing from other subsidiaries (i.e. the UK company can purchase services from an Irish company leaving minimal profits in the UK company capable of being taxed).

Thirdly, do the same between two Irish companies - one is not tax resident (say Bermuda) so it's not taxable under Irish law. The second company is taxable (based in Dublin) but it too must pay the Bermuda company licensing and service costs which reduce the taxable profit, i.e. the Double Irish Arrangement.

All of this results in minimal tax (mostly paid in Ireland at 12.5%) with the bulk of all profits ending up legally in Bermuda or Cayman. Emphasis on "legally"!

So you have two solutions:

1. The UK changes the law around transfer pricing to ensure greater taxable profits are recorded in the UK (same goes for France, Germany, Australia, The Moon ;)).2. Ireland changes its non-resident corporation tax law. This will never happen since its 12.5% rate should make it clear it's focus is on attractive well paying service jobs for its citizens - not shaking out the pockets of the golden geese supplying those jobs.

So this is really just that - the British PM mouthing off in public. France also likes to mouth about "tax harmonisation" - it charges 34% corporation tax vs the UK's 28%, Germany's 30% and Ireland's 12.5%. You can see the odd one out - Ireland has positioned itself as friendly to US Corporations.

You'll also note that the US has done nothing to upset this either. The US transfer pricing laws are what make all of this tax avoidance possible in the first place since taxes are levied only on repatriated profit (it never is unless there's one of those infrequent tax amnesties).

All legal, above board, and in a world where those who can change the law simply refuse to do so because it suits them as much as it suits Google.